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September 1, 2011

Company annual reports considered unreliable

Company annual reports are considered unreliable by half of non-executive directors, finance directors and fund managers, a research commissioned by BDO finds.

The BDO report, however, did find the majority of respondents think financial statements in public company annual reports are either the most important or a major element in the investment decision-making process.

BDO said the UK boardroom does not fully realise that annual reports form the basis of investors’ decision-making and only half of finance directors expect the investor community to use the annual report as a major source of information.

BDO partner James Roberts said the degree to which annual report is thought not to achieve that purpose is alarming.

The research was carried out for BDO by Populus, a member of the British Polling Council. Populus interviewed 250 financial directors at medium and large companies and 200 fund managers who invest in medium and large companies online between 12th and 24th May 2011. Financial directors worked in and fund managers invested in a wide range of industries. The questions refer to statutory audit. 

“Our research shows that while talk of the obsolescence of annual reports is ill-founded, there is a consensus emerging that they are in need of some major surgery. Action needs to be taken to address the lack of trust in annual reports, especially as their importance is still unanimously acknowledged,” Roberts said.

According to BDO data seven out of ten fund managers supported assurance being given on narrative information in the financial report and called for an extended element of assurance to be provided around the financial health of the business more generally.

On the other hand, four out of ten of non-executive directors were opposed to including assurance on the narrative section and 50% thought an extended element of assurance should be given on financial health.

Brooks Macdonald fund manager Peter Harris said that “given that the Financial Statements within annual reports are drawn up under the overly complex rules of International Accounting Standards, it is little wonder that their effectiveness is being questioned. Such is their complexity; they almost entirely fail to deliver meaningful information on the run rate of a business or future cash flows”.

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